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Due diligence when buying a business

On Behalf of | Mar 23, 2023 | Business Law |

Business ownership is an exciting and often stressful endeavor. However, when you own a business, you can experience financial benefits, better work-life balance and the joy of providing your clients with something that can help them.

Whether you seek to expand your business through mergers and acquisitions or you are a first-time business owner who wants to purchase an existing business, you need to do your due diligence.

Review existing contracts

You need to know what the seller has agreed to because you likely have to fulfill these responsibilities. Therefore, look for nondisclosure or noncompete contracts, purchase orders, security and collateral agreements, letters of intent, merger or acquisition closings, sales agreements, loan paperwork, lines of credit, leases and stock purchase agreements.

Review the financials

Collect the company’s financials, including their income and cash flow statements, general ledger, balance sheet, accounts receivable and payable, credit report, tax returns and audits, debts, expense reports, gross profits and inventory of all company assets. Verify these numbers with your accountant, and have the seller’s accountant go over them with you and explain any discrepancies. Also, discuss any current owner benefits.

Review the business structure

Gather the articles of incorporation, bylaws, amendments, current investors or shareholders, trademarks, state business licenses, product and service descriptions, marketing plan, branding paperwork and compliance requirements. Make sure the business is following its intended structure and bylaws.

Review customer and employee information

Verify the company’s customer information, including subscribers, sales data and communications. You should also review all employee information, including HR policies and benefits plans.

Look for any legal issues you may encounter, including unresolved past and possible future litigation risks. Then, verify the ownership of physical assets and intellectual property.